Indonesian Lending Drive May Spur Bad Loans, Erode Bank Income

A plan by Indonesia’s central bank to spur bank lending and economic growth may cause an increase in bad loans and erode earnings, according to Credit Suisse Group AG and Business Monitor International Ltd. 

Bank Indonesia will begin penalizing banks with loan-to- deposit ratios below 78 percent as of today. PT Bank Mandiri, the country’s largest lender by assets, boosted its ratio to 72 percent from 66 percent in June, according to a company spokesman. PT Bank Central Asia raised its ratio to 55 percent from 51 percent, Corporate Secretary Raymon Yonarto said, while PT Bank Negara Indonesia has a ratio of 68 percent, central bank figures show. 

“With the 78 percent floor in place asset quality is likely to deteriorate, leading to higher non-performing loans,” Eugene Leow, an analyst at research provider Business Monitor International, said in a phone interview from Singapore. 

“Profit margins will also take a hit as banks may have to lower lending rates to meet the minimum ratio, eroding their net interest margins.” 

Rising consumer spending is driving expansion in Indonesia, the world’s fourth-most populous nation, increasing pressure on policy makers to restrain price gains and protect purchasing power. The economy grew the fastest in six years last quarter, and the central bank raised its benchmark reference rate last month from a record low to curb inflation.

Loan Threshold

By setting a loan-to-deposit ratio threshold and stipulating the amount banks must hold as reserves, Bank Indonesia can bolster growth while keeping inflation on target, Governor Darmin Nasution said Sept. 6, when the new rules were first outlined. About 30 lenders had ratios below the required minimum, the central bank said at the time. Indonesian banks have a blended loan-to-deposit ratio of 76.8 percent, according to data compiled by Bloomberg. 

Bank Indonesia spokesman Difi Johansyah didn’t immediately respond to phone or e-mailed requests from Bloomberg News for further comment. 

If banks are forced to boost lending “then it’s quite easy to think they might relax their standards a little too much,” Robert Prior-Wandesforde, head of Southeast Asia economics at Credit Suisse, said in a phone interview from Singapore. “I’ve also heard that Bank Indonesia wouldn’t mind higher amounts of leverage in the economy to make its interest rate tool more effective.” 

Consumer loans in Indonesia climbed 22.7 percent last year compared with a 19 percent increase in 2009 and a 30 percent advance in 2008, Bloomberg data show. The country’s debt-to- gross domestic product ratio of 27 percent is also one of the lowest in the world.

‘Under-Banked Country’

Companies in Indonesia raised $10.8 billion from syndicated loans last year, little changed from 2009, Bloomberg data show. They agreed to $119 million of loans in January, the slowest start to a year since 2006, the data show. 

“Indonesia is a very under-banked country and there is clearly scope for loan growth,” Aninda Mitra, Moody’s lead sovereign analyst for the country, said in an interview in Singapore. “Any persuasion to increase lending needs to be handled carefully though given that inflationary pressures are becoming more evident.” 

President Susilo Bambang Yudhoyono is seeking to expand Indonesia’s economy at an annual average rate of 6.6 percent and to create 10.7 million jobs by the end of his second term in 2014. He’s also pledged to double infrastructure spending to $140 billion to improve and expand the archipelago’s roads, ports and power plants. 

Moody’s Upgrade

Moody’s upgraded Indonesia’s credit rating to Ba1 on Jan. 17, one step below investment-grade and the highest since the 1997 Asian financial crisis, citing the nation’s economic resilience. Fitch Ratings Ltd. raised the country’s outlook to positive Feb. 24. 

Bank Indonesia will impose a fine of 0.1 percent of a bank’s deposit base for every 1 percent shortfall in the loan- to-deposit ratio. It’s “almost impossible” for Bank Central Asia to meet the 78 percent target this month and so instead it will pay a penalty to Bank Indonesia of about 6 to 7 trillion rupiah ($795 million), Yonarto said. 

“We are not about to be doing any acrobatic lending,” he said in a Feb. 25 phone interview from Jakarta. “We will still lend conservatively. Over time, we are trying our best to meet the 78 percent.” 

A Bank Mandiri spokesman who declined to be named in line with company policy, said while the bank won’t lend “imprudently,” it would seek to meet the 78 percent target within two years. In the interim, a fine of about 1.2 trillion rupiah would be incurred, he said. 

Bank Negara investor relations manager Ryan Kiryanto didn’t respond to an e-mailed request for comment. 

While low benchmark interest rates helped depress banks’ cost of funding, rising rates may erode margins, Credit Suisse’s Prior-Wandesforde said. 

“The average lending rate in Indonesia is about 12.5 percent to 13 percent and the central bank rate is 6.75 percent, so banks are getting a comfortable spread,” he said. “There’ll be a squeeze on margins which may make banks less profitable.” Source: Bloomberg